I have argued many times that context and timing are crucial when it comes to the formulation and implementation of economic policies designed to transform economies, large or small.
And that inference is played out right before our very eyes every time a general election is in the air as politicians fight to either remain in office or take control of Government.
The fundamental question that always arises is, what is the best mix of policies for economic growth and development, given the prevailing circumstances in the economy? The answer is often two-dimensional, with Government defending its course of action and the Opposition taking the alternative perspective.
A shining example of the dilemma faced in seeking to grow and develop an economy is now playing out in quite significant ways in the United States and Europe. Specifically what is at stake is the never-ending discussion concerning the effectiveness of stimulus versus austerity measures to reverse the economic tides.
Leading the charge on the stimulus side is world-renowned economist Paul Krugman, who firmly believes the United States’ economy can only emerge from depression with massive Government spending, to the tune of about 130 per cent of the country’s gross domestic product (GDP).
That position is based in part on the notion that consumer and business spending are down and hence economic activity can only be boosted with massive injections of state funds. Furthermore, Krugman believes that the austerity measures imposed in some European countries have not worked and are in fact doing more harm than good.
Of course, the genesis of Krugman’s argument is that if the economy is depressed and consumers and businesses are not responding, the only other real option is for the government to step in and increase spending to maintain jobs, generate financial and economic stability, and subsequently grow the economy. That perspective is clearly in keeping with Keynesian economics.
A different approach is taken in several European economies, based on the implementation of what’s now famously called austerity measures.
Faced with high and rising fiscal and debt problems, the Europeans believe that in order to create a platform for future growth and development that will generate opportunities for job creation and private sector investment, the economies must first be stabilized through contractionary fiscal measures in the short run even if those measures result in job losses and rising tensions on the social front.
Clearly, what we have here are two opposing views with similar short term objectives but different long term possibilities in mind.
Austerity measures are designed to create stabilization in the short run with the possibility of long-term benefits to the economy.
Stimulus programmes on the other hand are also designed to avoid major disruptions in the economy in the short run but with the possibility of dire long-term consequences for growth and development when the debt created has o be repaid.
But remember, in many Keynesians’ mindset, “in the long run we are all dead”.
What do you think?
